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Netflix (Nasdaq: NFLX) Stock Falls Out of Favor as Members Slip Away

The tumultuous tale of Netflix Inc. (NASDAQ: NFLX) got another twist this week when the company reported disappointing earnings and guidance after the close Monday.

Netflix posted its first quarterly loss in seven years for the first three months of 2012.

The disheartening numbers and guarded sentiment prompted words of warning from analysts and caused investors to flee the DVD rental-by-mail and streaming video company. investors tuned out in Tuesday trading, sending shares down more than 13%.

While the earnings loss was substantially smaller than analysts' forecast, the focus remained on second-quarter estimates that warn of a slowdown in subscriber growth through early summer.

The time between April and June is historically a lethargic period for Netflix as longer days and warmer temperatures lure people outdoors and away from viewing movies and old TV shows at home.

But the picture for Netflix, once a media darling with Hollywood starlet-like status, looks fuzzy at best.

It is losing the one thing that made it a hot hit: its members.

Netflix (Nasdaq: NFLX) Falls Short

Netflix anticipated adding 190,000 to 790,000 subscribers to its video-streaming service in the current quarter. That was well below analyst estimates of more than 1 million.

"They are giving a signal to the Street their growth story is over," Wedbush Securities analyst Michael Pachter, who rates Netflix a "Sell," told Reuters.

The projection startled already-jittery investors who were watching for clues the company would revisit its once-impressive growth after suffering a chain of gaffes over the last year.

The Los Gatos, CA-based company noted it expected to add roughly seven million subscribers in its fundamental U.S. market in 2012, the same number it added in 2010. Several analysts expressed uncertainty about the lofty goal.

"We believe it will be challenging to reach this target," Charlie Wolf, an analyst at Needham & Co., penned in a note to investors.

Other analysts were less kind, calling the subscriber targets "ambitious" and "unrealistic."

Wolf also pointed out that Netflix has already had many customers join and cancel. The number of those highly recognizable red-and-white envelopes that once stuffed mailboxes is waning.

One reason for Netflix's slump is sluggish video game console sales, which have been a pivotal way for Netflix to add subscribers in the past, according to Anthony DiClemente of Barclays. That also weighs on the company's capacity to reach its target.

In addition, competition from other video services is gaining traction, most noticeably from behemoths Inc. (NASDAQ: AMZN) and Wal-Mart Stores Inc. (NYSE: WMT).

Raymond James analyst Aaron Kessler said Netflix's projection for the next quarter is a sign the company will have trouble drawing in new subscribers as more options materialize for Internet video streaming.

"I don't think anyone is ready to give Netflix the benefit of the doubt," Kessler told the Associated Press.

Netflix dented its storied brand last year when it increased the price of its popular subscription plan. Then, the company announced it planned to spin-off its DVD rental service into a separate business called Qwiskter, which was quickly squashed following investor and customer outrage.

The company has a great deal to remedy as it attempts to restore its once-stellar reputation among customers, investors and analysts. Netflix CEO Reed Hastings acknowledged as much in an interview Monday with The Wall Street Journal.

Hastings noted, "We said it's a three-year process and we're six months into that three-year process."

He added that Netflix has no plans to implement any "grand gestures" to win back disgruntled customers.

Turning Bearish on NFLX

Two and a half years is an eternity to traders, as well as some long-term investors. Netflix's slow turnaround has made most of The Street negative or neutral on Netflix.

Price targets fall into a wide range from $45 to $130, but the bulk hover around Netflix's current $85 a share.

The threats to Netflix's profitability are too ominous for many to consider it a "Buy."

"[G]iven these risks, we do not see a sufficient margin of safety to buy shares," said GAMCO Investors Inc.'s (NYSE: GBL) Brett Harris, who rates Netflix a "Hold."

When it comes to investing in Netflix, it just might be prudent to take in intermission.

NFLX closed down just shy of 14% on Tuesday, settling at $87.68. That is a long way off its 52-week high of $304.79. Shares slipped almost 3% by 3 p.m. Wednesday to $85.15.

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